The clue to HSBC’s new strategic priorities lies in the theme: Return to Growth and Value Creation. The update was steady rather than radical, which is positive for credit investors.
Recently-appointed CEO John Flint’s first strategy update was wide-ranging. Assuming normalising interest rates and synchronised economic growth, management are looking to drive increasing revenue and returns from areas of existing strength; turn around low-return businesses; improve the customer experience; increase competitiveness; and, via organisational simplification and investing in skills, make it easier to deliver for customers.
“From a credit perspective, the updated priorities were reassuring as they do not point to a radical change in strategy. The bank now has a growth mindset but does not intend to increase its risk appetite or diminish its balance sheet strength. This is good news for debt investors,” said Pauline Lambert, executive director in the financial institutions team at Scope Ratings. “Taken in the round, maintaining its risk appetite while aiming to improve returns, continuing to cut costs and targeting a higher capital position are credit positive.”
The 11% Return on Tangible Equity target is not materially different from the bank’s previous 10% ROE target, but HSBC will seek to achieve the new return target with a CET1 ratio at least 14% between 2018 and 2020. “While the bank has not met its return target over the last few years, the change in focus to growth rather than transformation provides better impetus for the target to be met,” Lambert said.
A key plank of the new plan is USD 15-17bn of investment in growth and technology. About two-thirds will be for investments in new opportunities as well as core businesses to grow, improve customer service and defend competitive positions. The remaining third of investments will for improving productivity and core infrastructure and required regulatory programmes and service sustainability such as cyber security.
The ability to keep up with technological change to meet changing customer behaviour and manage operational risks is an increasingly important consideration for banks. “While the bank emphasised the goal to embrace new technologies, the planned investment in this area and in technology more generally is difficult to assess as management did not provide a detailed breakdown,” said Lambert. In 2017, HSBC spent over USD 5bn on technology and between 2015-2017 over USD 2bn in digital investments.
The US continues to be the largest exporter of client revenue to the group (client revenue from US-managed companies booked outside the US) and HSBC is a top five cross-border USD clearer. The CEO acknowledged that while the US business is profitable, returns are far from satisfactory. Management considers the new >6% RoTE target to be achievable over 2018-2020 but does not see this as a limit. From resolving legacy issues, the focus will now be on organic growth.
“The CEO disclosed that there were many management discussions about the US business, with all options being considered, from making acquisitions to disposal. They concluded that because neither offered the same kind of value creation for shareholders it was better to turn around and grow the business,” said Lambert.
The bank plans to grow in the US across all divisions: increasing the number of corporate customers served by Commercial Banking (particularly international mid-market companies); increasing higher-return consumer lending and business banking in Retail Banking & Wealth Management; and expanding sector coverage and the share of foreign multinational clients in Global Banking & Markets. The bank said the investment required for this will be funded through efficiency gains.
The UK ring-fence is scheduled for completion in July, ahead of the 2019 deadline. As a consequence of the ring-fence, investors will have improved visibility over the quality of the UK operation. On the business front, HSBC wants to increase its share of the UK mortgage market and increase its commercial customer base. On the former, it has ground to make up: HSBC has a 14% share of UK deposits but only a 7% share of mortgages.
Summary of goals
- High single-digit annual revenue growth from Asia (building on the strength of the Hong Kong franchise and expanding in wealth management, including insurance and asset management)
- Mid to high single-digit annual revenue growth from the international network (opportunities include global liquidity and cash management, trade finance and securities services)
- Market share gains in eight markets where the bank is operating at scale as a universal bank (where it is considered a leading domestic bank with access to local growth opportunities): Hong Kong, UK, Mexico, Pearl River Delta, Singapore, Malaysia, UAE, Saudi Arabia
- A number one ranking among international banks for the Belt and Road initiative
- Completing establishment of the UK ring-fenced bank and gaining market share in UK mortgages and growing the commercial customer base
- Gaining market share in transaction banking
- Better employee engagement
- Continued progress towards the commitment to invest USD 100bn in sustainable finance by 2025
- An independently-assessed ‘outperformer’ ESG classification
- An >11% RoTE by 2020
- A >6%RoTE for the US business by 2020
- Positive adjusted jaws in each year on a full-year basis
- Redeploying capital into higher-return and capital efficient businesses
- Managing RWA growth to 1%-2% annually to drive an improvement in reported revenues as a percentage of average RWAs from c.5.9% in 2017 to c.7% in 2020
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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